I am intending to focus on two issues: the first is the basis of Budget Law; the second is a concept of double-entry budgetary system, especially the state capital management budget.
Firstly, the country’s Budget Law was introduced in 1994, one year before the State Council introduced a set of its enforcement regulations. If we compare the 1994 Budget Law to a house, now the house is in a fragile condition with a lot of problems concerning not only the budgetary law itself but also the country’s institution and environment, market foundation, as well as the current phase of economic growth. Thus, the law-revising efforts will not be completed with only improvement to concrete provisions. I will start by analyzing the basis of Budget Law:
The first would be a system of revenue distribution introduced in 1993, which had helped a lot in boosting the country’s fiscal revenues, rising from ten billion yuan in the year of 1993 to forty-two billion yuan next year, and eight point three trillion yuan last year. Seen from the consequence of the revenue reform, the revenue distribution scheme has resulted in a strong central government and weaker local governments, which has been pinned on to the Budget Law as a positive achievement . In the enforcement regulations of the Budget Law, the revenue distribution scheme was elaborated as including three categories: central revenues, local revenues and revenues shared between the local and the central, with the first category accounting for some thirty percent of the total, the second also thirty percent, and the third forty percent. However, the third category has actually been swallowed by the central treasury and the major way of distribution was named as transferring payment. Why we hear recently more stories about local officials visiting frequently their acquaintances in various central ministries and departments for the granting of national programs or projects, or more directly, appropriations? This is a natural result of our revenue distribution system featured by a strong central government and weaker local governments. After the introduction of such a revenue distribution mechanism, more powers had been entrusted to the local governments, coming with it was more local responsibilities like educational reform, health care reform, and especially the state-owned enterprises reform, laid-off workers, all of which may produce financial burdens on local governments that can only rely on transferring land use right in exchange for gains in local fiscal revenues, now accounting for more than forty percent in many provinces. Without such a channel of revenue (or referred to as special revenue in Budget Law), local governments would find no ways of funding social reforms or establishments. Of course, local governments may find other channels of funding, which we may discuss in the final section. However, local government debt may produce huge risks in the lone term.
Actually, our 1993 revenue distribution system was a basis of 1994 Budget Law, which was not considered a satisfactory solution and led to a situation featured by a strong central government and weaker local governments. Why we say that the revenue distribution system was a basis of the Budget Law? It is said that the government would live off its financial revenue and the budget would be a twin brother of revenue. We can see that the revenue distribution system have brought about a series of consequences, without its reform a further revision to the Budget Law will be largely restricted.
The second basis is the calculation of budgetary receipts, which is an issue with great importance. The 1994 Budget Law confirmed four revenue sources, the first category comes from taxes on the basis of revenue distribution system; the second category is national capital management budget, which has not been done in previous years; the third category is special revenue of the government, including land revenue; the fourth will be miscellaneous revenues, which, in my opinion, is the foremost concern of our budget law because this category has not been appropriately defined. China introduced a Law of Administrative Permission, a creative legislative more across the world. The law was targeted at administrative examination and approval process since during such a process a great sum of financial revenue would be produced, which would be categorized into miscellaneous revenues in accordance with provisions of our Budget Law. Strictly speaking, miscellaneous revenue also belongs to budgetary revenue. However, in the real practice, the country recognizes budgetary revenue, extrabudget revenue, and extra extra-budget revenue, which is a horrible thing for budgetary control. We take the story of a toll station in the northeastern province of Hei Longjiang for example, the municipal government has fixed a staffing quota for the station but refuse to cover the pay for its staffs who would have no other way than collecting fees and imposing fines to survive the harsh situation. In other words, the exact purpose of the government to establish such a toll station was to collect fees and impose fines, a popular practice that has been forbidden across the country, but the toll station still exist, so do its fee-collecting and fine-imposing actions. On the basis of such a theory, the reason for the existence of the government has been fundamental changed and could be anything rather than serving its people as government officials have claimed. Should government revenue like this be categorized into miscellaneous revenue in terms of our Budget Law? The Budget Law also defines fiscal expenditure, the structure of which includes socioeconomic development, national defense expenditure and other expenditures. The last category brings also uncertainties. Two major legislative techniques would be employed in contemporary law-making process: one would be named as “other or miscellaneous provisions”; the other would be separate regulations issued by the State Council. The two ambiguous legislative terms bring about problems resulting from uncertain demarcation between the government and the market in terms of their powers, which is also considered a source for much institutional confusion. It is my personal view that more and more so called “governments”nurtured by extra-budget revenues would possibly been seen if we do not impose restraints on or give no clear definition to fiscal revenues in Budget Law, which means that fiscal revenues and expenditures could be unrestrained in our Budget Law. This is what I mean by discussing bases for our Budget Law, and actually it offers important theoretical premise for further revision of the law.
Another question will be complex budgetary system including public finance budget, national capital management budget and social security budget. Compound budget was first adopted by Denmark, and later by the Roosevelt administration of the United States. However, what we adopt here in China in our Budget Law should not be called complex budget in real sense since the so-called complex budget requires two report forms indicating overall situation of the revenue and expenditure of the government, the flowing direction and volume of the capital, as well as its nature. Complex budget has not been practically implemented since its introduction in the year of 1994. What we have up to now is a public fiscal budget as released in a budget report made by the Ministry of Finance during annual sessions of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference(CPPCC), without including a national capital management budget and social security budget. Situation changes during this year’s two sessions of national level conference when the structure of fiscal budget was modified covertly to include public fiscal budget, government fund budget, and social security budget, a new structure that is plagued by many problems. The original social security budget and Council of Social Security Fund are basically social reserves established by the central authority at the beginning of 1990s in order to cope with a possible speedy aging of population in the year of 2020. In this term, the social security budget is an empty budget. The state capital management budget began its function only from 2008, before that year we had only public fiscal budget. However, the public fiscal budge, state capital management budget, government fund expenditure, as well as the social security budget constitute no complex budget, and they are quite different with general budge practiced in New Deal during Roosevelt’s Administration. General budget practice will differentiate between formal and informal budget. What we are doing now is to finance the state-owned enterprises subsidies, state-owned enterprises reforms, and social security program by using the public fiscal budget, a practice that might have jeopardized the basis of our Budget Law, namely the complex budget. However, the premise for the complex budget does not exist. I think this is a result of copying strictly the western complex budgetary system. Public fiscal budget, government fund budget and social security budget are all separate budgets belonging to the public budget, which could be listed as special items in public budget. Thus, I suggest that we may recover a singular budgetary system, getting rid of the complex one.
Now I am going to talk about the state capital management budget. Before 2008, profits of state-owned enterprises would not be handed over to the state, a serious problem that we have discovered when drafting a sate asset law, pushing the central authority to redress the situation. It would be a funny logic that state-owned enterprises jointly invested by the whole body of tax-payers have not been required to pay their shareholders back. Therefore, the central authority began to implement the budget system of state capital management in the year of 2008, going back to the original practice in the 1994 budget law and the enforcement regulations of 1995, but restricted only to the state-owned enterprises centrally administered. The centrally administered SOEs would be put into two categories: the first category is SOEs under the control of the State Asset Supervision and Administration Commission, or the SASAC; the second category is over 6,000 SOEs under the supervision and administration of central ministries and departments. At current state, only the first category of SOES are obliged to contribute to the state capital management budget, within which category three types of SOEs would be identified with the resource-type of SOEs contributing ten percent, the general type contributing five percent, and the budget duty of the defense industry enterprises has been totally exempted. Therefore, the country reported only 54.7 billion yuan in state capital management budget, in contrast to 900 billion yuan’s overall profits of the SOEs. The budget figure was 58.8 billion yuan in 2009, and 63 billion yuan in 2010. Stock dividends and share bonus from the SOEs are minimal compared with the huge investment by our tax payers. But why we have seen figures telling a different story online? The difference in figures may result from the combined reports. We can see that three factors are plaguing our current sate capital management budget that has been defined in Budget Law: firstly, at current stage, only the centrally administered SOEs are subject to the budget management, and our suggestion is that we should enlarge the range covered by the scheme to include all SOEs; secondly, the contribution ratio should be increased from some fifteen percent to over fifty percent because a large majority of the profits have been divided among staffs of the SOEs instead of all tax-payers; thirdly, the structure of expenditure focusing on increasing or reducing the state capital amount should be readjusted. Figures revealed in 2010 fiscal budget report showed that bankruptcy expenditure on SOEs stood at 300 billion yuan, and the number of bankruptcy cases across the country stood at 1,793, most of which are but privately owned enterprises. The country lacks a public and transparent information disclosure mechanism, which may lead to confusion about some figures in the budget report. We have no sources to know exactly how much of the transaction has been performed under the table. Reforms of the state capital management budget could be done in three aspects including range of coverage, expenditure structure, and contribution ratio, the improvement of which, namely making it a special budget item in the overall public fiscal budget, will help to cover our social security expenses and better our national welfare.